USCB Financial Holdings, Inc.

Good morning and welcome to the USCB Financial Holdings Fourth Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Lou Della Aguilera, President and CEO. Please go ahead.

Good morning, and thank you for joining us for USDB Financial Holdings' fourth quarter 2024 earnings call. With me today, reviewing our Q4 highlights, is CFO Rob Anderson and Chief Credit Officer Bill Turner, who will provide an overview of the bank's performance, the highlights of which commence on slide three. Our results in Q4 2024 highlight a record year for the bank as Team USAB outperformed our internal budget and delivered impressive results for our shareholders. A year ago, we posted 14 cents per share in diluted EPS in Q4 2023 and more than doubled these earnings this quarter to 34 cents per share Our continued focus on reducing deposit costs has contributed to net interest margin expansion, helping us maintain solid profitability. Benefiting from Florida's strong, resilient, and growing economy, USCB continues to pose strong gains in assets, deposits, diversified quality loan production, and profitability. Our performance underscores our disciplined execution of a business plan focused on commercial banking initiatives designed to profitably expand existing client relationships and grow new ones. In reviewing our Q4 highlights, I will comment on a select few data points as CFO Anderson will further detail our growth, profitability, capital, and liquidity positions. Driven by our various deposit-focused business lines, average deposits increased 225 million, or 11.8%, compared to the fourth quarter of 2023. These business verticals, which target deposit-rich private clients, attorneys, medical professionals, as well as correspondent and association banking have grown to over 625 million representing 30% of total deposits as of the end of the past quarter. Average loans increased 260 million or 15.3% compared to the fourth quarter of 2023. Our loan pricing has moved in line with the market as loan coupon rates decreased seven basis points compared to the prior quarter while increasing 46 basis points compared to the fourth quarter of 2023. As we look at profitability, net income was $6.9 million or $0.34 per diluted share, an increase of $4.2 million or 153.7% compared to the fourth quarter of 2023. Similarly, net interest income before provision increased $5 million or 34.7% for the past quarter in comparison to the fourth quarter of 2023. ROAA was 1.08% for the fourth quarter of 2024 compared to 0.48% for the fourth quarter of 2023, while ROA was 12.73% for the past quarter, again, compared to 5.8% for Q4 2023. Given the earnings power of the company, our outlook for 2025, and the strong capital levels, the board approved on January 21st, 2025, to double the quarterly cash dividend to 10 cents per share of the company's Class A common stock, The dividend will be paid on March 5th, 2025. The cash dividend program is an important driver to shareholder value and the board of directors is committed to the return of capital to our investors while maintaining a strong balance sheet. The following page is self-explanatory. Directionally showing historical trends since recapitalization. The disciplined execution of our business plan focused on developing the best people, products, and processes has consistently delivered efficient profitable performance guided by conservative risk management practices. So now let's turn our attention to our specific financial results and key performance indicators, which will be reviewed by our CFO, Rob Anderson.

Okay, thank you, Lou, and good morning, everyone. Looking at pages five and six, I've characterized Q4 as another fantastic quarter for USDB. Net income was $0.34 per diluted share, and absent the non-recurring expenses would have been $0.38 per share, and another record quarter for USDB. However, as reported, return on average assets was 1.08%, return on average equity was 12.73%, the NIM was 3.16%, and up 13 basis points from the prior quarter. The efficiency ratio was 55.92%, and adjusted for the non-recurring expenses would have been 51.41%. Tangible book value per share retreated $0.09 to $10.81, driven by a higher AOCI interest rate mark and higher share count. And last, credit metrics remained benign. So with that overview, let's discuss deposits on the next page. Deposits continue to increase both on a linked quarter and year-over-year basis. We have used excess liquidity to fund loan volume and walk away from rate-sensitive deposits and single-service product clients. Deposits decreased 18 basis points this quarter, and the reduction in our cost of funds has been a fundamental driver in our net interest margin improvement. So with that, let's look at the loan book. Average loans increased $80.3 million, or 17% annualized compared to the prior quarter, and $260 million, or 15.3% compared to the fourth quarter of 2023. Additionally, as we book new loans at yields above the portfolio average, our overall loan yields will remain stable or increased in the next couple of quarters as we continue to book loans with coupons above 7%. As a reminder, we book all loans with floors and prepayment penalties, which should help us in a down rate scenario. As for guidance, we expect loan growth to be in high single digits to low double digits going forward, particularly since we have experienced high interest rate volatility in the last couple weeks. Turning to page nine, you can see for the past five quarters, we have originated $754 million in new loans. And for the fourth quarter, we have originated $161 million, achieving a record quarter in terms of loan production, with a loan coupon of 7.14%. And in the last five quarters, our weighted average coupon was 7.79%, which helped increase our yield on earning assets. And while the loan coupon ticked down this quarter, it is still 89 basis points above the portfolio average. Also worth noting is that we have been able to diversify our loan book over time. As of quarter end, non-real estate loans are 27% of the total loan book. Let's look at the margin. One of the most impressive accolades this year is the success story of the NIM. In 2024, our NIM went from 2.62% to 3.16%. an improvement of 54 basis points in a matter of three quarters. Equally impressive has been the improvement on net interest income. Compared to the fourth quarter of 2023, net interest income increased 5 million or 34.7%. As we enter 2025, this increase will generate significant earnings power going forward. The drivers include a lower deposit cost, larger balance sheet, higher loan yields, and an improvement in our earning asset mix. Going forward, We believe the NIM will hover around current levels near term, but we can expect further expansion in 2025 given a more normalized yield curve. Moving on to page 11. According to our ALM model, the bank's balance sheet is neutral for year one as we have made strategic changes in the last couple quarters to prepare for a lower rate environment. Most notably, we have favored money market retention rates over long-term CD rates. We have focused on three to six-month CD terms Moreover, we will adjust the term of our liabilities depending on the current expected interest rate scenario. For now, we are aiming for a neutral balance sheet. One of the benefits of having a neutral balance sheet is that the bank's financial performance can be more predictable in an uncertain rate environment. As mentioned on earlier calls, we have also pruned the balance sheet from rate-sensitive deposits and single-service product clients. During the last couple of quarters, we have adjusted down our deposit rates without losing meaningful relationships, this has translated into a more resilient balance sheet. Additionally, if the Fed Fund's rate does drop this year, that will help our deposit costs, and with the rise in the 5, 7, and 10-year rates, will help new origination loans at higher rates. In short, this will give us a more normalized yield curve, which is great for the banking industry in general, but will really benefit benefit us as we tend to book loans at five years fixed rate with a spread over the U.S. Treasury rates. With these changes, we believe our NIM performance can hold at the current levels near term and expand into 2025, especially if the yield curve normalizes. With that, let me turn it over to Bill to discuss asset quality.

Thank you, Rob, and good morning, everyone. Please turn to page 12. As you can see from the first graph, the allowance for credit losses increased to $24 million in the fourth quarter. This was due to a $1 million provision, and the ratio increased three basis points to an adequate 1.22% of the portfolio. $650,000 of the provision is related to a consumer loan relationship consisting of a yacht and a tender vessel, which were repossessed during the fourth quarter. The remaining provision was driven by the $38 million quarterly net loan growth. Net losses were zero for the quarter and the year. The remaining graphs on page 12 show the non-performing loans as a quarter end, which remained unchanged from the third quarter at $2.7 million and represents 0.14% of the portfolio. Classified loans increased slightly to 0.37% and represent less than 3% of capital. The bank continues to have no other real estate. On page 13... The first graph shows the loan portfolio mix at 1231. The portfolio increased $38 million on a net basis in the fourth quarter to $1.97 billion. The composition continues to be well diversified. Commercial real estate represents 58% of the portfolio or $1.1 billion segmented between retail, multifamily, owner-occupied, and office properties. The second graph is a breakout of the commercial real estate portfolios for the non-owner-occupied and owner-occupied loans, which also demonstrate their diversification. The table to the right of the graph show the weighted average loan-to-values of the commercial real estate portfolio at less than 60%, and the debt service coverage ratios are adequate for each portfolio segment. The loan quality and payment performances are good for all segments, and the past due ratio remains at less than one-half of a percent and below pure banks. Overall, the quality of the portfolio remains good with past due ratios below peer banks. Rob?

Thank you, Bill. Outside of the NIM, fee businesses were the other bright spot in the quarter and for the year. The standout this quarter is the team's repeated performance in interest rate swaps. Since Q1 of this year, we have seen an uptick in clients managing their debt obligations with interest rate swaps. Additionally, We had $169,000 of prepayment penalties booked in other service fees line items. With other line items straightforward, let's look at expenses. Our total expense base was $12.9 million and contained over $1 million in non-recurring expenses. Salaries and benefits increased $730,000 and contained $620,000 of expenses related to an accelerated restricted stock award. These shares have a three-year ratable vesting period, but for a couple executives, the first vesting period was recognized or vested in the last two months of the year. In 2025, we'll have a more normalized vesting period on this stock grant. Additionally, legal expenses increased to $173,000 for various items, and other operating expenses increased to $174,000 related to forced placed insurance. We expect reimbursement for both items in the coming quarters. As noted on the slide, these non-recurring expenses had a negative four cents per share impact on our fully diluted earnings per share for the quarter. On an adjusted basis, the efficiency ratio would have been 51.41%, which is more in line with our guidance and run rate improvement this year. Looking forward, we expect Q1 expense base to be around 12 million and move up from there throughout 2025. So with that, let's turn to capital. Three things to note on capital. First, we doubled the dividend to 10 cents per share. This increase is a direct result of the current performance and expected future performance of the bank. Next, AOCI increased to a negative 44.5 million with an increase in interest rates across the five, seven, and 10-year tenor points. And as you know, this negatively impacts our tangible book value per share. And last, the end of period share count increased with a restricted share grant and Q4 in individuals exercising options in the quarter. So with that, let me turn it back to Lou for some closing comments.

Thanks, Rob. Our plans for 2025 are rooted on the ongoing strength of Florida's economy, which continues to attract industry, entrepreneurs, and consumers to a state which offers a welcoming tax climate, global accessibility, and a highly skilled workforce. This past year, Florida was again ranked the second in the nation as the best state for businesses. As we have seen, this economic fuel propels our growth and hones our strategies. Since launching our IPO in 2021, both total assets and deposits have grown by 47%, while loans increased 75%, expanding our balance sheet by $825 million. If Florida was a country, it would be the 15th largest economy in the world, which is forecasted to grow by 2.2% in 2025 slightly ahead of the national economy's growth forecast. Consistent migration of new residents and business continues as the state population approaches 24 million. U.S. Century services the strong, diversified, and dynamic market. We forecast growth in 2025 to be in the high single digit to low double digit range, as we continue to optimize operational efficiency, maximize profitability, and maintain pristine credit quality. With that said, I would like to open the floor to Q&A.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2.

At this time, we will pause momentarily to assemble our roster. The first question comes from Woody Lay with KBW. Please go ahead.

Hey, good morning, guys. Morning. Morning. I wanted to start on wood production and specifically slide nine where you sort of outlined the weighted average coupon on new production. The yields were down a little bit in the fourth quarter. I know rates were moving. But is that also a reflection of, you know, increased competition impacting pricing? Any thoughts there?

Woody, I think it's a combination of both. Clearly rates went down and, you know, our portion of the book that is variable went down with it. Competition here in Miami-Dade County is sporty, let's say. But again, we have our focus on where we want to be in pricing. And if it's not a fully banked relationship with deposits and the possibility for growth the way we want it, we'll pass on it.

Yeah, the other thing, Woody, I would add to that would be we did have a chunk of that new loan production in the fourth quarter. in our correspondent banking group. Those are typically 180-day lines of credit. Those are typically a little thinner than our commercial real estate loans or CNI loans as well. That brought down that quarter's origination yield.

Got it. That's helpful. it does feel like you know expectations for loan growth across the industry are picking up and you know south florida is a very competitive market how do you think about deposit growth in the year ahead and and does it pick up in competition does that impact the ability at all to lower deposit costs going forward um good question i mean we've we've talked for

probably quarters and maybe years that we have a very good loan engine here at USCB. I think the market is very strong, and it really comes down to the funding. And our challenge and how we're gearing the sales team is that we have to have strong bankers that can produce on both sides of the balance sheet, um but the deposits will be uh the challenge and i think if you ask any bank that would what would be the response but uh you know right now we're growing the deposit book in line with our loans and we fully expect that to happen in the coming year yeah and then lastly the the time deposit portfolio you know it's 15 of deposits it's not overly large but any color you can provide on

the maturity schedule there and repricing dynamics?

Yeah, I don't have specifics on the repricing, but I think it's about 180 in the next year if my treasurer is giving me the answer there. So we'll have opportunity there. We're pricing that lower. I think that's actually a good opportunity. We are pricing I would say, along with the Fed funds line or a Fed funds curve. So we would expect that book to come down over time, especially if we get one or two rate drops in 2025.

All right. Thanks for taking my question. Congrats on the nice quarter. Thank you, Woody.

The next question is from Michael Rose with Raymond James. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. Lou, in the opening comments, you mentioned that the specialty verticals are, I think, 30% or so of deposits. You know, just as we think about South Florida and some of the challenges from the hurricanes and insurance and things like that, and specifically related to the association deposits, any sort of concern there? Is that something you plan to maybe de-emphasize as we move forward, just given the challenges, you know, related to some of those associations that we've all read about? And then, you know, just broadly as it relates to deposit, you know, competition down there, is it all fairly rational, just holistically? Thanks.

Sure. I'm bullish on the association banking. If you look at the – At the data, I think it's over 30% of the population of the state lives in a condominium. So the thing is to choose them wisely. We really look at associations that are professionally managed. When we do our analysis, we really focus on the number that are owners versus renters. We don't go after every single one. We look for ones that have the credit qualifiers that we want and I think there's plenty of those. So it is in our best interest to be choosy as we've been from the very beginning. I believe that the volume is still going to be significant and we have a clear focus on this area. So I believe that these verticals that I mentioned at the beginning are gonna continue growing Our Juris Advantage, which is focused on the attorney business, which is a deposit-rich market. We service it well. Those clients are responding. So I believe that both these areas and the others, the MD Advantage, which is focused on the medical business, are all scalable, and we have plans to develop them well.

Okay, helpful. Thanks for that. Rob, maybe just on slide 14, when you look at the service fees, what is in that other category that increased fairly meaningfully queue on queue?

Yeah, that was the prepayment penalties. So like we said, we booked loans with Florida prepayment penalties, and we did get paid off on a sum, and then we got paid for it. So that was in the other line item in service fees.

Got it. Um, thanks. I appreciate that. I'm sorry if I missed it. And then maybe just finally for me, appreciate the, uh, the, the outlook on expenses, obviously some, some non-recurring, uh, you know, items this, uh, this quarter. Um, can you just discuss, you know, what the, uh, what the hiring plans are for this year, uh, and what's baked into your, uh, your assumptions for expense growth and maybe what the market looks like for, for, you know, competition for, uh, for those sorts of lending hires. Just, just want to see if, uh, You plan to be a little bit more opportunistic this year, just given the relative strength of the South Florida markets. Thanks.

As we prepare the budget, we closely look at this, and we feel that we are properly staffed for our plans for 2025. Being opportunistic is something that is what we do, and we've been good at it. So when those individuals become available, we will move on them. But it's nothing that we're really – budgeting for just in case it happens. We feel very comfortable that our staffing levels are proper and our production teams are prime for action.

Okay, great. I appreciate you taking my questions.

Thank you, Michael.

The next question is from Fetty Strickland with the Hovde Group. Please go ahead.

Hey, good morning. Just wanted to start drilling down on fees a little bit here, you know, specifically the swap fee income, you know, came in pretty good, as you guys indicated it would last quarter. And Rob, I think you mentioned there's still a decent pipeline there. I mean, what should we expect in the next couple quarters from that line item?

Yeah, that one's going to move around a little bit. I mean, this year, I think the market and where interest rates were definitely favored swap activity. I think that could quiet down into 2025. And we'll be looking, if that does go down, we'll be looking to offset that decrease with increases in our wire fees, our TM fees, and SBA gain on sales. So that could trend down into 2025. I think, you know, For the year, we probably booked over $3 million. I would not anticipate that level of activity in 2025. That's fair.

And I was going to ask what the opportunity was on SBA, just kind of what you're seeing in terms of pipelines looking forward and kind of how much we could see that grow over the course of the year potentially.

Well, we were planning to more than double what we did in this past year. We have a a strategy that we actually shared with our board this past meeting. Our focus is going to be on a certain business segment that we're gearing up for. All our lenders are adept on the SBA 7A program. This is something that we've been training them on now for three years since we launched the program. Initially, it was led by the department head, every single lender that we have has been participating. They have good marketing support, and they know their goals and their strategies. So I think we're in good shape for this year and for that SBA fee volume to increase.

Thank you for that. That's helpful. And just, you know, last for me, just thinking about the especially lending segments, you know, between yacht financing and some of the other areas.

Where do you see the most green shoots for 2025?

I think the yacht financing is going to be steady as it's been the last few years. We're entering all the yacht financing Actually, it's the yacht season with all the boat shows coming up, the Miami International Boat Show and the Palm Beach, et cetera, all throughout the state. So that usually spikes volume. I think everything else is going to be steady and growing. On the global side, we have visited all our bank customers that are on the – On the lending side, every single one of them was visited in the last two quarters. Very good feedback from those visitations. We expect that they're going to continue borrowing and growing the relationships. And it's not necessarily adding new clients there, but expanding on the relationships that we already have. So we feel very comfortable that it's going to be a very productive year with them. And HOA, as I said, also... is going to continue moving forward. I forget exactly what the percentage is, but it's almost, I'm going to say it's near 50% of the HOAs in the state of Florida are over 30 years old, so they have to be going through the 30- and 40-year certifications. They're going to be looking for, you know, re-dos on roofs, on windows, and there's going to be, I think, tremendous opportunities there.

Got it. Thank you so much. That's it for me. Thanks, Betty.

The next question is from Steven Scouten with Piper Sandler. Please go ahead.

Hi, good morning, everyone. Sorry, I hopped on a few minutes late, but wondering if you can talk about, and apologies if I missed it, but loan growth obviously was still good this quarter, but maybe a little bit light of what it has been in the recent past. If that was just elevated paydowns or any other trends you're seeing and kind of how you think about trend line? What could be, you know, best case scenario growth for you guys in 25 or maybe a lower end if things don't quite pan out like we all hoped?

Well, this past quarter, there was quite a bit of payoff activity, probably more than you normally see on a quarterly basis, especially on our On our correspondent banking section, which as we mentioned earlier, these are 180-day terms. But again, we believe that the borrowing is going to continue in that area. We don't really have any issues there. And we have prepayments on the commercial side. I attend all pipeline meetings as does Rob and Bill on a weekly basis. We are constantly in communication with our lenders. We know what the competition is doing. The pipeline going forward I think is as strong as any one that we've had in the past four quarters. So I think that the loan demand is going to be there. And as I said earlier, we believe that it's going to be high single-digit, low double-digit growth. That's what we're planning for.

Okay, great. Very helpful. And then I know, Rob, you had kind of said, hey, it's the deposit growth that really helps to fuel the potential maximization of the loan opportunities and maximizing the team's potential. Are there any new deposit verticals potentially coming out on the horizon or any new initiatives from a deposit front that you guys would endeavor towards to drive even higher deposit growth? Or is it just a continuation of working what you guys have built and maximizing those platforms?

Yeah, I think it's optimizing what we have. I think we have a lot of talented people on the team that are sophisticated in their area of expertise. We started MD Advantage this past year. I think there's a lot of opportunity there. Our private client group is seeing a lot of activity and continued growth. And I think it's just growing what we have and giving our team the right tools and the products. And I think they're doing a fantastic job in the market. So I think we'll continue to grow our deposit book in line with our loan book. And part of the key will be making sure we get the operating accounts. And we can tweak maybe incentive plans a tad or two on the deposit side. But I don't think we need new verticals or new teams that add to the expense. I think it's working with what we have.

If I can, we chose and developed the association banking, the correspondent banking, the attorney business, and the medical because we believe that they are incredibly scalable in this market. So it's not really about adding new lines. It's about maximizing what we have, and within the strategies, there are opportunities to bring in new teams. We have done that very successfully, and we will continue to look for those opportunities. But I believe that the ones that we've chosen, the ones that we've developed and market and trained our people to execute on are very scalable and with a lot of demand.

Nice. That's great commentary on the scalability. Appreciate that. And then just last thing for me would be loan loss reserve kind of levels. Obviously, you guys have a fantastic credit book, De Minimis, non-accruals, but the reserve continues to build as a percentage of loans. As we move forward, if credit holds where it is, could we see those existing dollars of reserves kind of be more flat and just cover loans incremental loan growth versus building as a percentage of loans? Or how do you guys think about that loan loss reserve percentage relative to your exemplary credit?

Thank you for the exemplary credit comment. It will probably grow in relation to the growth in the portfolio as the net loans grow. The reserve will take up a basis point or two as we grow. As long as there's no hiccups in credit quality, we should see slow, steady, one basis point to two basis point growth or even holding steady each quarter as we go forward.

I think, you know, maybe just adding on to that, you know, I think we were, I don't know, around 119 last quarter. We moved up to 122. I think part of that is the Bill mentioned the yacht and the vessel. that we put a provision on. Other than that, I think the general pool is probably around 119. That's certainly adequate. You benchmark that compared to some of the credit quality. So I don't think it will move materially, maybe in dollars, I think. Bill's mentioning certainly with loan growth, but I think we're very adequately reserved. Yeah, for sure.

Okay, that makes a lot of sense. Thank you guys for all the color. Congrats on a great quarter and a great year.

Thanks, Stephen.

This concludes our question and answer session. I would like to turn the conference back over to Lou de la Aguilera for any closing remarks.

Lou de la Aguilera Okay, thank you very much for your attendance. On behalf of the U.S. Century team, I would like to thank you all for your attendance and look forward to meet again at our next earnings call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.